Fall in input cost, export subsidy extension vital for two wheeler companies like Hero Motorcorp and Bajaj Auto

The top two companies in the twowheeler sector - Hero MotoCorp and Bajaj Auto - are seeing renewed investor interest after several months, with stocks trading close to their 52-week highs. According to analysts at broking firms, motorcycle manufacturers have benefited from an expansion in their rural marketing strategy and continued to grow their vehicle sales, even in a rather difficult operating environment marked by rising finance rates that have not shown signs of easing.

Also, with the country experiencing a broadly normal monsoon this year, investors remain confident of rural demand, going forward. They are equally positive about the growth prospects for the motorcycle segment. Motorcycles constitute nearly 79-80% of total two-wheeler sales. This is in contrast to the scenario in other segments of the auto industry such as four-wheeler passenger cars, where domestic demand has been rather sluggish and the outlook also remains difficult in the near term. Hero MotoCorp closed 0.7% lower at Rs 1,993 on Tuesday and is not too far away from its 52-week high. Bajaj Auto gained 4.2% to Rs 1,545 and is also within striking distance of its 52-week high.

Meanwhile, in July 11, the total motorcycle sales growth moderated to 13.2% on a YoY basis to 9.5 lakh units. During the June 11 quarter, growth in total motorcycle sales was nearly 18.9% YoY. In contrast, in the case of fourwheeler domestic passenger car segment, in July '11, their total sales declined nearly 9% from a year-ago period. Also, in the June 11 quarter, growth in domestic passenger car sales on a YoY basis was considerably slower than that recorded during FY11. Investors have been cautious when it comes to players in the four-wheeler car segment. For instance, Maruti Suzuki, at Rs 1157.9 per share, is hovering just above its 52-week low.

Also, in the case of Tata Motors, investors are worried that the current Euro region debt crisis could curtail the growth outlook at the company's Jaguar Land Rover operations in the near term. At Rs 727.8 per share, the stock is also hovering close to its recent 52-week low.

However, for the broader auto industry, a small cushion for operating margins is expected from a weakening in key commodity input prices over the past few weeks. Analysts highlight the fact that it is still too early to determine if this trend will be sustained in the September 11 quarter. Also, investors are waiting eagerly to see if the government extends the export promotion scheme DEPB, beyond September 30.

Hero MotoCorp trades at a P/E of 20 times on a trailing four-quarter basis and factors in the growth prospects in the short term. Bajaj Auto trades at 12.9 times.